Clancy's Motors has the following demand to meet for custom manufactured fuel injector parts. The holding cost for that item is $.75 per month and each setup costs $150. Lead time is 0 months

Question

Calculate the planned order releases using: (a) the EOQ technique, and (b) the POQ technique.
What are the costs of each plan, including the holding cost of any inventory left over after month 7?

Month 1 2 3 4 5 6 7
Requirement 100 150 200 150 100 150 250

Answer 1

(a) The annual holding cost = ($0.75/month)(12 months) = $9.00
Average monthly demand = 1100 / 7 = 157 units
Annualized demand = 157(12 ) = 1884 units
The EOQ = sq rt[2(1884)(150 )/9] = 251 units
Order 251 units in months 1, 3, 4, 6, and 7
Total inventory held = 0 + 151 + 1 + 52 + 153 + 53 + 154 + 155 = 719 units
Setup costs = 5($150 ) = $750
Holding cost = 719($0.75 ) = $539
Total cost = $750 + $539 = $1289

(b) POQ Interval = 251 / 157 = 1.59, rounded to 2 months.
Order 250 units in month 1, 350 in month 3, 250 in month 5, and 250 in month 7
Total inventory held = 0 + 150 + 0 + 150 + 0 + 150 + 0 + 0 = 450 units
Setup costs = 4($150 ) = $600
Holding cost = 450($0.75 ) = $338
Total cost = $600 + $338 = $938
POQ performs much better in this example.